International arbitration : the ICSID Convention : a convenient solution

 

for companies in conflict with states.

 

Comments on the recent broadening of the concept of

 

“Investments” figuring in article 25 of the Washington convention

 

 

By Dominique GRISAY

Partner

VANDEN EYNDE & PARTNERS

ICSID Arbitrator

 

 

 

I. INTRODUCTION

 

 

The Washington Convention of March 18, 1965 established the International Centre for the Settlement of Investment disputes (ICSID), which was designed to help solving investment disputes between states and nationals of other contracting states[1]. Pursuant to the adoption of this convention, many an international contract have been submitted to the jurisdiction of the ICSID. This tendency has even increased in the latter years.

 

The success of this arbitration formula is linked to the fact that it gives both parties an increased certainty about the way in which case will be handled as well as on the possibilities of execution.

 

It remains that ICSID arbitration can only be referred to in case of disputes relating to investment in the meaning of article 25 of the ICSID convention1. The concept of investment figuring in the convention is however a rather vague one. The early analysts of the ICSID convention appear to have been rather doubtful as to the exact meaning that should be given to this notion. As will be shown hereunder, the tendency was however already to remain rather open to a wide variety of situations.

 

In the recent past, a number of ICSID arbitrations have, once again, addressed the notion of investment with the idea to better define the meaning of this concept in ICSID arbitrations.

 

According to us, the result of this new jurisprudence is to broaden the scope of the jurisdiction of ICSID. The question is to know whether the extension of the concept of investment is not likely to deter, in the future, developing countries to participate in ICSID mechanisms.

 

 

 

 

II. ARTICLE 25 OF THE ICSID CONVENTION

 

 

Article 25 of the ICSID convention[2] states that :

 

“(1) The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally…”.

 

 

 

III. THE CONCEPT OF “INVESTMENT” IN THE ICSID CONVENTION

 

 

Christoph H. SCHREUER[3], one of the most prominent specialists of the ICSID convention, states that :

 

“The concept of investment is central to the Convention. Yet, the Convention does not offer any definition or even description of this basic term. The working paper’s draft on jurisdiction did not even contain a reference to “investments”. Mr. BROCHES advised against limiting or defining disputes since it would be difficult to find a satisfactory definition and since any definition was likely to lead to jurisdictional of controversies. On the other hand, a number of delegates found more precision desirable. The Preliminary draft included the requirement of the existence of an investment dispute but failed to offer a definition. The subsequent discussions showed a widely held opinion that the definition of the term “investment” was necessary. At the same time some suggestions as to possible definitions were put forward. But Mr. BROCHES continued to oppose a definition.”.

 

A first draft introduced the following definition of the concept :

 

“For the purposes of this chapter (i) “investment” means any contribution of money or other assets of economic value for an indefinite period or, if the period be defined, for not less than five years ;”.

 

The definition mentioned above was however considered unsatisfactory. The Secretariat of the Convention then presented another definition of the concept :

 

“The term “investment” means the acquisition of (i) property rights or contractual rights (including rights under a concession) for the establishment or in the conduct of an industrial, commercial, agricultural, financial or service enterprise ; (ii) participations or shares in any such enterprise ; or (iii) financial obligations of a public or private entity other than obligations rising out of short term banking or credit facilities”.

 

 

 

The latter definition did not find support with the delegates so that, eventually, a British proposal that omitted any definition of the term investment was adopted by a large majority of members of the legal committee. In other words, the delegates negotiating the Washington convention deliberately omitted to include a clear definition of the concept of investment in the ICSID convention. Some wisely advocated that, since parties were not obliged to subscribe to the jurisdiction of the centre, those who would accept to refer their case to ICSID arbitrations were those who considered that the dispute was manifestly related to an investment. In this way, the definition of the notion of investment is considered to be left over to the parties.

 

 

 

IV. KEEPING THE BROAD VIEW ON THE SUBJECT

 

 

It seems that the first years of existence of the ICSID convention did not bring about clarification on the concept of investment and its meaning. In 1979, C.F. AMERASINGHE[4] wrote an interesting article in which he stated :

 

“While it is not possible to provide a definition of “investment” for the purpose of the Centre’s jurisdiction, in view particularly of the absence of international case law on the subject, it may not be inappropriate to draw some conclusions from the material presented above.

 

First, it is clear that what is included in the term “investment” depends entirely on the purpose for which the concept is relevant. Thus, dictionary definitions devised for the purpose of economic science or financial analysis may be irrelevant for the purpose of defining investment in connection with the Centre’s jurisdiction. So also tax law or investment law definitions in municipal law are intended to relate to special objectives and would be of limited usefulness, although it may be pointed out that in some investment promotion legislation a broad approach is taken to the concept of “investment”…”.

 

“The purpose of the convention is primarily to promote foreign private investment in less developed countries as a means to development by providing a forum for the settlement of disputes. On the other hand, there is a clear indication that consent between the parties to a dispute is the cornerstone of the centre’s jurisdiction. As pointed out earlier, article 25 lays down what are the “outer” limits of the centre’s jurisdiction. It is to say, in the context of the question of what is an investment, the agreement of the parties would prima facie be determinative, whether it is explicit or implicit, although such agreement may be questioned in exceptional circumstances where a transaction can not by any stretch of the imagination be regarded as an “investment”. Clearly, of course, where there is no such implicit or explicit agreement on whether a transaction is an investment or not, it will be possible to raise the issue whether the transaction is an investment but a tribunal or commission would only hold that the transaction was not an “investment” if it would defeat the purposes of the convention to hold that it was an “investment”.”

 

 

 

 

 

“Subject to these remarks, it may be appropriate to know that investment promotion treaties (and even legislation) have gone as far as to include “any kind of asset” in the definition of “investment”. Thus, a broad approach to the interpretation of this term in article 25 is warranted. While it may be difficult to accept “any asset” which could include even simple sales contracts (for the supply of goods) as an investment, it may be possible to consider, for example, suppliers’ credit and even consultants’ contracts as investments in the appropriate circumstances. The duration of the agreement and the regularity of profit or return would in these cases be irrelevant factors as would the surrounding circumstances of the agreement.”

 

The solution proposed is a very broad one. The only exclusion to it is strictly the supply of goods.

 

This broad view, which remains applicable, has, since then, been repeatedly confirmed in a series of ICSID decisions. We shall analyse shortly, hereunder, the latest decision taken by ICSID arbitrators inasmuch as they are relevant for a definition of the concept of “investment”.

 

 

 

V. DEFINITION OF THE CONCEPT OF “INVESTMENTS” IN THE RECENT ICSID CASE LAW

 

In a recent decision of July 2006 (L.E.S.I. Spa, ASTALDI Spa v. Algeria, ICSID case n° ARB/05/03)[5], the arbitrators have summarised the criteria that allow ICSID tribunals to decide whether a particular contract is an investment or not. The decision, which was written in French, refers in paragraph 72 to a series of interesting ICSID decisions such as FEDAX N.V. versus Venezuela, CCOB versus Slovakia, SGS versus Pakistan, SGS versus The Philippines.

 

The tribunal states, at the end of paragraph 72, that in order to be considered as an investment in the meaning of article 25 of the Washington Convention, it is requested that :

 

“ a. the contractor has realised a contribution in the country concerned,

b. this contribution is made for a certain duration of time and,

c. it incurs a certain risk for the investor[6]“.

 

The decision does not foresee that the contribution should help the economical promotion of a country, a condition which is difficult to establish and, so to say, implicitly covered by the three elements mentioned above.

 

 

 

 

 

 

 

The tribunal further analyses the three conditions mentioned above. The following general elements should be underlined :

 

« (i) As regards the contribution : one can only consider that there is an investment “if a party makes, in a given country, contributions of an economical value”. This clearly aims, in first instance, at contributions of a financial nature. However, not admitting other types of contributions would be too restrictive. These contributions may consist in credits, materials, furnishing of services, inasmuch as they present an economical value. In other words, the contracting party must engage costs, under any form, in order to achieve an economic goal.

In the same way, these investments are often made in the country concerned, although this should not be considered as a prerequisite. Nothing impedes that those investments be made in the investor’s home country but in view and within the framework of a project to be realised abroad…”.

 

“(ii) As regards the duration : even though this question is difficult to appreciate, the concept should be understood broadly. Indeed, in order to speak of an investment in the meaning of the Convention, one has to be confronted to economical contributions of a sufficient duration.”

 

“(iii) As regards the risk : the requirement is also understandable, if one refers to the aims of the Convention. The idea was indeed to offer a special warranty to companies wishing to invest in foreign countries. Therefore, it would be too restrictive to limit the application of the convention to contracts including an aleatory element, such as insurance contracts. The risk at stake relates in fact to any kind of contract implying increased uncertainties for a signatory party. It is, for this reason, not sufficient that the contract offers control mechanisms and that disputes arising out its execution be submissible to national jurisdictions. Under this formula, the agreement would be applicable to any kind of investment, insurance contracts included. Without willing to put the independence and quality of local courts at stake, signatories have decided to offer an easily understandable procedure, foreseeing the intervention of international arbitrators, in addition to ordinary mechanisms.”.

 

 

 

VI. INTERESTS AND DANGERS OF A BROAD DEFINITION OF THE CONCEPT OF INVESTMENT

 

 

The definition figuring in the recent ASTALDI case is very interesting because it broadens as much as possible the scope of application of the ICSID convention. Indeed, one can consider, when reading the decision that, as soon as expenses are made by an undertaking partly in a third country, the contract concluded with this third country may qualify for an ICSID arbitration. According to us, this extensive definition could even be applied to ordinary sales, provided, for instance, a reasonable after sales’ guarantee is given to the buyer country.

 

In other words, given the position presently adopted by ICSID arbitrators, almost any kind of contract implying investments in a broad sense in a third country may be submitted to the jurisdiction of ICSID arbitral tribunals.

 

 

 

It should be underlined that this positive situation has been clearly understood by many a company in the recent years and that the number of cases which have been submitted to ICSID  has dramatically risen. ICSID arbitrations move swiftly and concentrate on the essence of the dispute. Arbitrators will however always take the time to scrupulously analyse the presence of the conditions enabling them to render a decision. If such conditions are met, they will scrutinise the contract and the conditions under which parties can be granted the most adequate compensation.

 

This all being said, one should add that the constant increase of ICSID cases can have adverse effects on the mechanism itself. Indeed, as a result of the increase of the number of cases, many a country taken to ICSID arbitration find themselves obliged to compensate companies for loss incurred on their territories. This situation, and the broadening of the scope of ICSID arbitrations, has brought about some reflexion in a number of states. Recently, The Philippines, which had lost the SGS case, decided that they would no longer accept the recourse to arbitration with foreign companies and modified a new BIT agreement accordingly.

 

The Pakistani Attorney General recently declared at an ICSID seminar that if Pakistan had known how the ICSID convention was going to be applied, its country would not have signed the Convention or would have limited drastically its scope of application.

 

This all means that practitioners should be well aware that going too far in trying to extend the scope of ICSID arbitrations might lead, in the long run, to a change in position of many a developing country.

 

 

 

 

Dominique GRISAY

ICSID arbitrator

VANDEN EYNDE & PARTNERS

dominique.grisay@vdepartners.be